Does size matter?

Bigger players like Bank of Queensland (BOQ), Suncorp, Macquarie Bank and ING Direct may have the funding and brand recognition to command a decent share of the third-party channel, but the smaller players are making serious inroads with sharp rates and quality service.

Let’s consider the meteoric rise of Credit Union Australia (CUA) in the second half of 2014.

It was at a media luncheon in Sydney 12 months ago that former Mortgage Choice chief executive Michael Russell revealed that CUA had gone from representing one to two per cent of the group’s mortgage flows to 10 per cent in just six months.

CUA later revealed details of its relationship with the listed mortgage group. According to CUA general manager, products and marketing, Jason Murray, the lender’s relationship with Mortgage Choice goes back a long way.

“I think we have had the relationship for over a decade,” Mr Murray said. “We were a bit quiet during the GFC with them, but we have re-established that relationship over the last three years.”

Mr Murray explained that the key driver of CUA’s growth during the last six months of 2014 was the launch of new products that it was able to take to market after completing its core system replacement.

“Mortgage Choice is our primary partner and has obviously been a very important part of our growth for a long time, and a very important channel,” he said.

“We think we should at least be representing and reflecting the Australian market and if 50 per cent of customers are accessing the broker network, we should be trying to represent that kind of mix as well.”

Smaller lenders like CUA have been leading the market with the lowest home loan rates on record, despite not having access to the significant funding advantages that the major banks enjoy.

Personalised service

Brokers require fast turnaround times and quick decisions from their lender partners in today’s market.

Rates are at record lows, fuelling demand for home lending, which means the importance of mortgage providers being able to deliver on service has never been greater.

Gateway Credit Union says it provides competitive pricing with a personalised touch, allowing brokers to talk directly to underwriters and credit assessors.

“We are a small, closeknit team, so a broker can deal with the same person throughout the process,” Gateway senior manager, partnerships and alliances, Phillip Horder, says.

“Deals are assessed by humans not robots – we don’t credit score your client, we individually assess each application on its merits,” Mr Horder says.

“We also have a high degree of flexibility in our product set: our Premium Package in particular has unlimited extra and bulk repayments, unlimited free loan offset accounts, free and unlimited redraw and four free loan splits.”

This level of flexibility is something that most brokers would associate with a specialist lender. Having this kind of service delivered with prime lending products by a lender that competes directly with the majors is a rare proposition and one that few banks would be able to equal.

Customer-centric approach

Given that customer-owned institutions exist purely for the benefit of their customers, a focus on quality service is characteristic of the mutual lender offering.

“We don’t need to consider external shareholders and provide them with a dividend or capital growth on their investment,” Mr Horder says.

“We’re not solely profit-driven and [we] invest back into the business, which translates to more competitively priced products and superior service outcomes.”

In addition, natural synergies exist between mutual lenders and mortgage brokers – both are effectively small businesses in the banking world, Mr Horder says.

“I think we better understand the challenges small businesses face. I believe this makes for better alignment with brokers and creates a better model for delivering value,” he says.

Many non-major banks work in niche areas, targeting specific market segments, but Gateway sees itself as a true alternative to the majors.

“We may be smaller than the big four, but in terms of product, policy and service we have broad appeal,” Mr Horder says, adding that the mutual lender takes a long-term view of managing risk in its portfolio – and that means taking a balanced approach to market segments.

“Like many lenders, our focus at present is in the sub-80 per cent LVR band and we expect that to continue. However, there is always a level of appetite across most LVR bands for appropriate applications.”

LENDER PROFILE: TEACHER'S MUTUAL BANK

For brokers, what is Teachers Mutual Bank’s point of difference?

Teachers Mutual Bank (TMB), as a bank for people employed in the education sector and their families, offers brokers a unique opportunity to target this niche section of the market. We also have a very strong focus on customer service, some of the highest member satisfaction scores in Australia, competitive rates and great product features.

What are the benefits of being a customer-owned institution?

As a mutual bank, we invest profits back into providing better products and services for our members. As a result, we pride ourselves on our highly competitive interest rates and value-adding loan features, such as our free 100 per cent mortgage offset facility, which is available on both variable and fixed home loans. As a customer-owned institution, we are able to offer a more personalised banking experience. We also have strong ties to our community and to ethical values. For the last two years, we have been named among the World’s Most Ethical Companies by the Ethisphere Institute and in 2014- 15, we provided $1.67 million in
community support, equating to 4.55 per cent of our pre-tax profits.

Are there synergies between the third-party channel and smaller, mutual banks?

Brokers often attract customers who are looking for a more personalised service. This is something that Teachers Mutual Bank is well equipped to offer to both its brokers and members. As a smaller lender, we can be agile, have fast response times and put your needs first.

Why would a broker choose a mutual lender over a larger second-tier or major bank?

Teachers Mutual Bank offers highly competitive rates, great product features and has a reputation for creating satisfied members. In fact, Teachers Mutual Bank is consistently ranked amongst the top performing banks for customer satisfaction and has been crowned Roy nMorgan Bank of the Month on six occasions already in 2015. Since we began partnering with brokers two years ago, over 1,000 brokers are now accredited with us, and that number is growing. We have enjoyed steady and consistent growth in home loan performance, and in fact outperformed the rest of the banking sector in the last financial year.

Does TMB consider itself a niche lender?

Teachers Mutual Bank is a niche lender with a strong focus on the education sector and their families – that particular market includes over 500,000 people throughout Australia. We know and understand the education sector and have in depth knowledge of their unique financial needs. Our products and lending policies are designed with our niche market in mind, providing tailored financial products especially for them.

Which home loan markets has TMB been targeting?

Our loan products are targeted primarily towards owner-occupiers and investors. There are plans to launch a new, very competitively priced owner-occupier product to market later in the year, so watch this space!

How is TMB targeting certain borrower markets?

Teachers Mutual Bank assists accredited mortgage brokers with specialised marketing collateral designed to help generate enquiries from potential members in the education sector.

Have recent regulatory changes forced TMB to change which borrower markets it targets?

Due to APRA requirements, Teachers Mutual Bank has reduced the maximum LVR for investment lending from 95 per cent LVR including LMI to 85 per cent plus LMI. In addition, we have adjusted our servicing calculations and removed some discounted rates for investors.

WILL THE MUTUALS BE FORCED TO CONSOLIDATE?

Moody’s Investors Service says Australian mutual lenders will be under increased pressure to consolidate as slowing economic growth and regulatory changes weigh on Australia’s smaller banks While measures taken by the prudential regulator to restrict investor housing loans are credit positive for asset quality in the broader financial system, they will boost competition in the owner-occupier market that the mutual sector is more focused on, according to a Moody’s report.

The report found that, on average, owner-occupier loans make up 79 per cent of total housing loans among mutuals, compared to 61 per cent for all financial institutions.

The report, titled Australia’s Mutual Financial Institutions: Rising Competition to Challenge Growth, found, on a positive note, that the competitive disadvantage of the mutuals relative to the major banks will be somewhat narrowed by APRA’s recent decision to raise the amount of capital required for residential mortgages at banks using the internal ratings based (IRB) approach to calculate regulatory capital.

The report noted that slowing economic growth, weakening labour market conditions and rising house prices are significant risks to Australia’s residential mortgage market – a key lending focus for the mutual sector.

“On a fundamental level, mutuals are facing increasing competition in their core franchise of home mortgage lending from Australia’s four major banks, whose large economies of scale and superior access to wholesale funding put them at a competitive advantage,” Moody’s vice-president and senior analyst, Daniel Yu, said.

“Specifically, the proliferation of online and third-party banking channels, as well as the use of multi-brand strategies by the major banks, directly threaten mutuals’ traditional relevance and appeal as community based niche players,” says Mr Yu.

The report found that structural challenges faced by mutuals have been the driving force behind ongoing consolidation within the sector, which has been shrinking by an average of eight entities per year over the past
10 years.

In addition, pressure on profitability is exacerbated by the RBA’s monetary easing, which has lowered mutuals’ loan rates more than their deposit rates, given that deposits include transaction accounts that earn almost no interest.

“However, these pressures are moderated by the absence of a shareholder structure, enabling management to fully reinvest profits back into the business,” the report said.

“Moody’s views this as a key support for the mutual sector’s credit profile, as it provides mutuals with the flexibility to forego growth in order to convert capital when operating conditions turn volatile.”

Mr Yu said that while most mutuals will continue to generate sufficient capital internally to maintain their existing capital levels, those with weaker franchises or a smaller scale will be affected by price competition and higher operating costs – factors that will likely continue the sector’s long-standing consolidation trend into 2016.